Results

FY13 core net profit of RM25.4m came in below our expectations, accounted for only 89% of our forecast. Against the consensus, the results came in above, exceeded consensus estimates by 6.7%.

Deviations

Weaker-than-expected sales volume.

Dividends

None

Highlights

YTD. Despite revenue remained flattish at RM2.1bn, FY13 core net profit improved to RM25.4m (from RM0.4m a year ago) mainly on the back of improved cost structure at the blast furnace and the absence of lumpy inventory writedown (recall, Ann Joo recorded RM57.8m inventory writedowm last year).

QoQ. 4Q13 turned into the black (from a core net loss of RM0.6m) to a core net profit of RM6.3m, mainly on the back of better cost structure arising from the utilization of cheaper energy inputs at the blast furnace.

Despite the qoq earnings recovery, we are still maintaining our cautious view on the overall steel sector (including Ann Joo) earnings prospects, as: (1) Overcapacity issues will continue to drag the sector’s earnings prospects (and it remains to be seen if the continuous efforts is effective to counter dumping activities); and (2) Higher electricity tariff (effective Jan 2014) will further impair players’ razor-thin earnings, given the highly competitive steel market in the region.

Risk

Downside risks-

• Overcapacity in China remains over the longer term; and
• Volatile input prices, making the sector a play on short-term potential price trend.

Forecasts

Maintained, as we believe our numbers have adequately reflected the company’s bleak earnings prospects.

Rating

HOLD

Negatives: (1) Volatile and subdued steel prices; and (2) Overcapacity in the region.

Positives: (1) Likely to be the first to benefit at times of steel prices upswing, thanks to its aggressive procurement strategy; and (2) Move to enhance its value chain by investing into a mini blast furnace.

Valuation

Maintain TP of RM0.97, based on unchanged 9x FY15 EPS of 10.8 sen. Downgrade to SELL as the downside potential has exceeded our threshold of -10% following the recent share price movement.

Source: Hong Leong Investment Bank Research - 27 Feb 2014